Critical Analysis of Accounting Ratios in Measuring Financial Performance

A critical analysis of the use of accounting ratios to measure the financial performance in the
organizations
[Unilever Vs P&G]
Name of the Student
Name of the University

TABLE OF CONTENTS
Chapter 1: Introduction..............................................................................................................4
1.1 Background of the Study..................................................................................................4
1.2 Purpose of this Study.......................................................................................................5
1.3 Background of the Organisations.....................................................................................6
1.4 Aim and Objective of the Study.......................................................................................6
1.5 Research Questions..........................................................................................................6
1.6 Rationale of the Study......................................................................................................6
1.7 Structure of the thesis paper.............................................................................................7
Chapter 2: Literature Review.....................................................................................................8
2.1 Introduction......................................................................................................................8
2.2 Theoretical Background to Financial Analysis................................................................8
2.2.1 Concept of Financial Analysis..................................................................................8
2.2.2 Financial Statements used in Financial Analysis......................................................9
2.2.3 Financial Ratio Analysis.........................................................................................10
2.3 Performance analysis with financial ratios....................................................................11
2.4 Ratio Analysis 'Evaluating Past Performances And Predicting Future'.........................13
2.5 Financial analysis and decision making.........................................................................16
2.6 Conclusion......................................................................................................................17
Chapter 3: Research Methodology...........................................................................................18
3.1 Introduction....................................................................................................................18
Chapter 4: Data Analysis and Discussion................................................................................19
Chapter 5: Conclusion & Recommendations...........................................................................20
References................................................................................................................................21
Appendices...............................................................................................................................24

CHAPTER 1: INTRODUCTION
1.1 Background of the Study
The two essential objectives of each business are profitability and solvency. It is noted that
the concept of profitability is the capacity of a business to make benefit, while solvency is the
capacity of a business to pay out the debt amount (Brigham et al. 2016). Be that as it may, the
accomplishment of these targets requires proficient administration of assets of the business
through budgeting, planning, anticipating, control, and decision making. Additionally, the
qualities and shortcoming of the business should be distinguished and vital remedial
estimates connected. Strikingly, accounting gives data that encourages these capacities
(Kraft, 2014).
Essentially, accounting measures and conveys financial data required for decision– making.
Along these lines, the American Accounting Association (Hoskin, Fizzell, and Cherry, 2014)
characterized accounting as "the way toward recognizing, estimating and conveying financial
data to allow educated decisions and choices by the information from Income Statement and
the Balance Sheet." The Income Statement demonstrates the productivity or gainfulness or
operational consequence of a business, while the balance sheet report demonstrates the
dissolvability or budgetary position of a business (Grant, 2016).
The motivation behind setting up the financial statements of an organization is to pass on data
on the general execution and the situation of such an association to every invested individual.
In addition, stakeholders of these financial statements so as to uncover the money related
qualities and shortcomings of such an association so as to frame a conclusion as respect her
going-concern. Be that as it may, ratio examination is one of the courses through which the
fiscal statements could be deciphered (Thomas et al. 2016). While ratio analysis is
additionally a strategy utilized by money related administrators and speculators alike to look
at an organization's financial structure, conditions and exhibitions with guidelines winning in
such industry with the end goal of high-lighting enhancement or weakening in the pattern of
the business execution. Ehiedu (2014) characterized ratio analysis as the efficient results of
ratios from both inner and outer money related reports to abridge enter connections and
results so as to assess budgetary execution.
According to the managerial perspective, Performance examination assumes a crucial job in
giving such data to the administration, which is required for arranging, basic leadership and

control e.g. operational examination gives net edge, working cost analysis and overall
revenue. Resource the managerial traces resource turnover, working capital under stock
turnover, debt claims and payable. Productivity position demonstrates return on resources,
Earning Before Interest and Tax (EBIT) and profit for resources (Uechi et al. 2015). Easton
and Sommers, (2018) expressed that, "The executives can gauge the adequacy of its own
arrangements and choices, decide the suitability of embracing new approaches and strategies
and records to proprietors because of their administrative endeavours." Thus, the executives
ought to analyse a lot of data with regards to different assets put at the transfer of an
endeavour.
Then again, According to Brigham et al. (2016), "Significance of Performance lies for
proprietors/potential speculators should know effortlessly. The budgetary position of an
organization by profit for total assets, return on basic value, income per share, income per
share, profits per share, profit yield, profit inclusion, value income ratio, market to book
esteem, pay out/maintenance." The potential financial specialists of the business association
thus are keen on the present highlights.
1.2 Purpose of this Study
As indicated by Xu et al. (2014), "Accounting {or financial} ratio is an extent or division or
rate communicating the connection between one thing in a set fiscal reports and another thing
in the budget statements. Accounting ratios are the most amazing of all apparatuses utilized
in investigated and translating financial statements". In this way, ratio analysis includes
taking details of number (or things) out of budget reports and framing ratios with them, to
improve educated decisions and choices (Islam, 2014).
Subsequently it very well may be said that business choices of make or purchase, venture or
divestment, development or remorse, capital-association and recreation, etc. can't be
legitimately made without the guide of money related ratios (Marozzi, 2016). They offer sign
to the money related qualities and shortcomings of a business, and feature parts of a business
requiring further examination. Budgetary data gave in financial statements are valuable in
business choices. Notwithstanding, it must be noticed that financial statements are
unfortunate chore not an end in themselves (Kanapickienė, and Grundienė, 2015). In this
manner the utilization of financial statements in basic leadership isn't in every case simple
inferable from the issue of outlined nature of the data contained in budget statements, they

should be broke down and deciphered by methods for money related ratios to empower the
executives and partners comprehend them and settle on very much educated business choices.
Along these lines, this research paper is completed to indicate how ratio analysis encourage
supervisors, investors, financial specialists, banks, and different partners settle on educated
decisions and choices about the past execution, current condition, and fates capability of a
business.
1.3 Background of the Organisations
1.4 Aim and Objective of the Study
The aim of this study is to reveal how application of ratio analysis technique helps business
organisation to evaluate, predict and decision making.
The objectives of this study are as follows:
Objective 1: To apply ratio analysis technique in evaluating and prediction the performance
of Unilever and P&G as well as intensifying areas that regret improvement;
Objective 2: To assess whether ratio analysis useful to management investors, shareholders
and creditors in their business decisions;
1.5 Research Questions
Question 1: Is ratio analysis useful in evaluating and prediction the performance of a business
as well as intensifying areas that regret improvement?
Question 2: Is ratio analysis useful to management investors, shareholders and creditors in
their business decisions?
1.6 Rationale of the Study
The examination was directed with the assistance of information got from analysis of
financial statements. The examined financial reports are Unilever and P&G’s annual reports
of multi-year from 2009/2010 – 2017/2018 and the evaluated financial records are acquired
from the organizations’ annual report. The truth that industry average couldn't be
incorporated into the examination obliges the legitimacy of the analysis. Nonetheless, the
specialists trusted that the multi-year organisation performances from the examined annual
report offers far reaching data about the budgetary execution of both Unilever and P&G.